Software sector Switzerland
The economic significance of the independent software sector
Part 1: The size of the independent software sector
Part 2: Partnerships in the independent software sector
Part 3: Advance work procured by the independent software sector
Part 4: Productivity effects of the independent software sector
A study on behalf of ICTswitzerland,
conducted by Dr Pascal Sieber & Partners AG, Berne,
in cooperation with the Universities of Berne and Lausanne,
September 2004.
Principal and publisher:
ICTswitzerland
Editorial:
Claudio Dionisio, Markus Lengacher, Dr Stefan Meierhans, Nicole Scheidegger, Dr Pascal Sieber, Professor Dr Carl August Zehnder
Authors:
Dr Georg Müller-Fürstenberger, Daniel Hässig, Dominica Roser (parts 3 and 4), Dr Pascal Sieber, Nicole Scheidegger (parts 1 and 2)
ICTswitzerland welcomes the reproduction of contributions and illustrations (including excerpts) quoting the source and with a copy to ICTswitzerland wherever possible
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Berne, September 2004.
Most important results
The majority of the 11,329 independent Swiss software companies are small and operate on a local basis. The majority of the 63,401 employees work in the fields of software development and consultancy. The independent Swiss software sector[1] largely focuses on the implementation of standard foreign software. Application software is the only area in which domestic manufacturers are almost as important as foreign ones.
Software companies pay salaries that are well above-average whereby women benefit less than men – but they are also not paid top salaries either. The software sector trains a below-average number of apprentices although the majority of managements complain of a shortage of qualified personnel.
The independent software sector is an important motor in the Swiss economy with growth that is well above-average. Its contribution to gross value added is about one fifth as much as the financial sector.
IT services[2] are one of Switzerland's 43 business sectors; they obtain services from other sectors to a fairly low degree. However, this sector is heavily interconnected internally.
In contrast, the other sectors obtain services totalling CHF 13.4 billion from the IT services sector. With at least CHF 1 billion, the public administration sector (where outsourcing plays a major role) is the largest customer followed by telecommunications (this also includes the telephone system) with over CHF 800 million while the financial sector produces a large number of IT services internally. The entire ICT field (* inc. telecommunications) has a turnover of CHF 25 billion.
The significance of the independent software sector becomes clear when one sees what the consequences of inadequate investment in the sector are: The damage will be enormous if the sector grows more slowly than the overall economy. The Swiss economy loses up to CHF2.3 for each franc that is missing in the software sector each year.
Table of contents
Most important results
Issues and focus
Part 1: The size of the independent software sector
Number of companies
Number of workplaces
Wages
Training places
Growth
Gross value added
Part 2: Partnerships in the independent software sector
Leverage effect: software manufacturer/software service provider.
Importance of partnerships
Part 3: Advance work obtained by the independent software sector
IT services as suitable aggregation
Input structures, advance work
Interconnections
Part 4: Productivity effects in scenarios
The direct investment scenario in IT services
The economic growth scenario
Stagnation scenario in IT services
Summary
Issues and focus
This report describes the importance of the independent software sector[3] for the Swiss national economy. Its importance is measured by its size, the interconnections of the sector at home and abroad as well as on the basis of overall economic productivity effects.
Four questions are answered below:
1.How big is the independent software sector in Switzerland?
- To what extent do standard software manufacturers trigger off added value among downstream software manufacturers?
- How much advance work does the software sector procure in relation to its own added value?
- How large are the productivity effects based on changes in the software sector?
The independent software sector is composed of several part-branches of trade and services (cf. Table 1).
TradeWholesale trade / Software wholesalers
Retail trade / Software retailers, distribution partners and value-added resellers
Service / (= software development and consultancy)
Implementers / System vendors, IT consultants,
management consultants
Developers / Individual software developers,
standard software developers
Table 1: Parts of the software sector
Indicators are used to assess the economic importance of the software sectors. We call them key performance indicators (KPI). As far as possible, the KPI are taken from regularly conducted, up-to-date and reliable, often official statistics. This guarantees that the KPI can be compared between different countries and different sectors (cf. Table 2).
No. / Key performance indicator / Statement on1 / Number of businesses (part 1) / Size of the sector
2 / Number of workplaces (part 1) / Size of the sector
3 / Wages (part 1) / Size of the sector
4 / Training places (part 1) / Size of the sector
5 / Growth (part 1) / Size of the sector
6 / Gross value added (part 1) / Performance of the sector
7 / Leverage effect: software manufacturer/ software service (part 2) / Size of the sector
8 / Productivity effects (parts 3 and 4) / Performance of the sector
Table 2: Key performance indicators
Supplementary information on this report can be found in the annexes:
Annex 1:Tables with all data on the size of the independent software sector.
Annex 2:Georg Müller-Fürstenberger, Daniel Hässig and Dominica Roser: The importance of the IT services sector for the Swiss national economy, 2004.
Part 1: The size of the independent software sector
Number of companies
Based on the overall number of independent businesses in the ICT sector[4], the software sector has a share of 82.74% with 11,329. They represent 3.57% of all Swiss companies. Most companies in the software sector offer software development and consultancy (86.04%). Only 119 companies are active in the wholesale trade while there are 1,462 companies in the retail (cf. Table 3).
Number / As a % of software / As a % of ICT / As a % of CHWholesale trade in software / 119 / 1.05% / 0.87% / 0.04%
Retail trade in software / 1,462 / 12.90% / 10.68% / 0.46%
Software development/ consultancy / 9,748 / 86.04% / 71.19% / 3.07%
Total software sector / 11,329 / 100.00% / 82.74% / 3.57%
Table 3: KPI 1 - Number of companies in the software sector
Most Swiss software companies work in one location, open practically no branches and are active on a local basis. On average, wholesalers have 1.7 locations, retailers have 1.1 and software developers and consultants only 1.04.
Number of workplaces
On average, software developers and consultants employ fewer than six members of staff. They thus have fewer than the average of all services companies (with almost 9 members of staff per company). In the software retail trade, the average number of employees is a little lower (almost 5 members of staff per company). With an average of 11 members of staff, the software wholesale trade is above the Swiss average.
Software developers and consultants account for 82.74% of ICT companies, but only employ around 51.62% of the staff. They are therefore not only small in comparison with companies in other sectors, but also in comparison with other ICT companies. This circumstance has a parallel in the procurement figures: Of the entire volume of IT expenditure in Switzerland, only around 23% goes on software.[5]
Most employees in the software sector are employed in the fields of software development and consultancy (86.59%). Only 1,387 work in the wholesale trade and 7,112 in the retail trade (cf. Table 4).
Number / As a % of software / As a % of ICT / As a % of CHWholesale trade in software / 1,387 / 2.19% / 1.13% / 0.04%
Retail trade in software / 7,112 / 11.22% / 5.79% / 0.19%
Software development/ consultancy / 54,902 / 86.59% / 44.70% / 1.50%
Total software sector / 63,401 / 100.00% / 51.62% / 1.73%
Table 4: KPI 2 - Number of employees in the software sector
Wages
With a figure of CHF 7,680, average gross wages in the software sector are higher than in all other sectors. Wages went up by 2.4% in 2003.[6]
However, software companies do not pay any top wages. The banking sector and telecommunications pay the highest salaries. In contrast to the banking sector, the wage gap in the software sector between high and average incomes is small. However, the wage gap between men and women in the software sector is greater than the average of all service companies: Women in the software sector earn 28% less than men. As an average of all Swiss companies, the figure is 21%.
Training places
Between 1998 and 2001, the software sector more than doubled the number of its apprentices. However, with a figure of 2.7%, the number of apprentices per employee falls short of the Swiss average of 4.7% (cf. Table 5).
Employeesin 1998 / Apprentices
1998 / In %
1998 / Employees
in 2001 / Apprentices
2001 / In %
2001
Total for Switzerland / 3,471,428 / 164,249 / 4.7% / 3,668,468 / 170,832 / 4.7%
IT service providers / 42,198 / 677 / 1.6% / 65,265 / 1,729 / 2.6%
Total software sector / 41,846 / 861 / 2.1% / 71,900 / 1,964 / 2.7%
Software development and consultancy / 35,542 / 591 / 1.7% / 63,401 / 1,497 / 2.4%
Software wholesale / 1,439 / 13 / 0.9% / 1,387 / 25 / 1.8%
Computer and software retail trade / 4,865 / 257 / 5.3% / 7,112 / 442 / 6.2%
Table 5: KPI 4 - Training places[7]
Of all the apprentices in Switzerland, the software sector employed 1.15%. If this number were proportional to the share of employees, it would have to amount to 1.73%. That would mean 380 apprenticeships more.
Growth
Company development
Between 1998 and 2001, the software sector underwent major growth: The part-branch software development and consultancy saw a growth in companies of around 50%. Consolidation took place among the software wholesalers in the same period (10%). The software retail trade saw a slight increase (+6%).
Development of the number of employees
Not only the number of software companies, but also the number of employees increased to a major degree between 1998 and 2001 (+60%). 64% more personnel were employed in software development in 2001 than in 1998. The wholesale trade, which is less relevant in terms of employment, recorded a drop in employment (-4%). There was growth of +6% in the retail trade in software.
New formations
The number of new formations in the software sector decreased between 2000 and 2002 by one half. Newly formed software companies also employ fewer members of staff at start-up than was the case in 2000. The companies formed in the software sector are therefore fewer in number and smaller.
Gross value added
In Switzerland, the tertiary sector has a more than 70% share of all gross value added. While services turned out to be the motor for growth in the Swiss economy between 1998 and 2000, the growth of gross added value in the year 2001 was even slightly higher (2.8%) than in the secondary sector (2%).
Within the service sector, the software sector contributes substantially to growth. With a figure of 7.6%, it showed the largest growth in the service sector between 2000 and 2001: The growth rate between 1999 and 2000 amounted to as much as 12%. In contrast, while the loans and credit business has the largest share of gross added value in the service sector; its gross added value, however, has declined from 2000 to 2001 by 10%. With a figure of CHF 7.45 billion, the share held by the software sector in the gross added value of Switzerland as a whole amounts to 1.75%. In comparison: as the largest branch of business, the loans and credit business contributes CHF 40.4 billion (10%) to the entire gross added value. The software sector is also at least one fifth as large as the loans and credit business.
CHF in millions / As a % of software / As a % of ICT / As a % CHWholesale trade in software / 202 / 2.71% / 1.38% / 0.05%
Retail trade with software / 445 / 5.97% / 3.05% / 0.10%
Software development/ consultancy / 6,803 / 91.32% / 46.65% / 1.60%
Total software sector / 7,449 / 100.00% / 51.09% / 1.75%
Table 6: KPI 6 - Gross value added
Part 2: Partnerships in the independent software sector
Standard software manufacturers cooperate with distribution partners. The distribution partners put the relevant standard software into operation at the end customers' premises. Dependent on the complexity and degree of maturity of the standard software, this requires more or less planning, installation and implementation work. This provides downstream companies with an existence. In this connection, people speak of the leverage effect that standard software manufacturers create.
Leverage effect: software manufacturer/software service provider
The leverage effect can be shown using the Key Performance Indicators (KPI); however, these are heavily dependent on the type of standard software under consideration. In addition, there are few studies available that carry out this quantification. Software manufacturers are not particularly keen to issue statements on this, for example, because the turnovers in concerns that are active worldwide are not posted by country. Table 7 summarises the data available and complements it with its own surveys.
Leverage effect / KPI / LimitationGermany[8] / 7.5 / Net sales / Only Microsoft
51 / Employees / Only Microsoft
Europe[9] / 4.6 / Employees / Only standard packaged software
Europe[10] / 2 to 4 / Employees / Only standard packaged software
Switzerland[11] / 4 / Employees / Only SAP
17 / Employees / Only IBM
1 to 2 / Employees / Only SUN
23 / Employees / Only Microsoft
Table 7: KPI 7 – Leverage effects
Taking IBM as an example, Table 7 shows the following: for each person working at IBM Switzerland, 17 persons are employed at IBM partner companies for consultancy and the implementation of IBM software in end-customer projects. Because it is not easy in practice for standard software manufacturers and downstream companies to clearly allocate the staff, turnover and further KPI, these figures have been estimated on the basis of various surveys and clarifications. Nevertheless, they are based on information provided by standard software manufacturers.
The leverage effects differ between SAP, IBM, SUN and Microsoft to a substantial degree. These differences are attributable to the type of software and to the degree of vertical integration of the manufacturer. The figures given here have nothing to do with the manufacturers' performance. In addition, in Table7 only the leverage effect in terms of software is shown. Some of the companies mentioned also deal in hardware. The extent to which the hardware trade makes downstream added value and employment possible is not the subject of this study.
Importance of partnerships
Below and based on the opinions of the members of the business managements of downstream software companies, we show the extent to which they consider partnerships with standard software manufacturers to be important for their business success.
We differentiate according to dealers, implementers and developers (cf. Table 1).
In the case of standard software manufacturers, we differentiate between foreign and Swiss manufacturers as well as between four types of software (cf. Table 8).
Switzerland / Outside SwitzerlandStandard packaged software / Standard packaged software
Application software / Application software
System software / System software
Other software / Other software
Table 8: Types of standard software
The statements made by members of business management of software companies form the basis of the following evaluations. The survey was structured and took place in the summer of 2004. Alongside the assessment of partnerships, the questionnaire inquired about some very confidential information on the companies (e.g. staff costs, EBIT). Plausibility tests were carried out based on this information. 77 very confidential questionnaires were evaluated finally.
Figure 1 shows how many different types of standard software manufacturers the respondents foster partnerships with. 30% of the respondents have a partnership with all types of foreign software manufacturers (standard software, application software, system software). Only 20% have an equally broad-based network with Swiss manufacturers. Only 14% of the respondents claim that they foster no institutionalised partnerships with another software company.
Figure 1: Partnerships with types of software manufacturersSwiss software companies consider partnerships with foreign manufacturers to be more important than those with Swiss. In particular, this applies to relationships with packaged standard software and system software manufacturers. In contrast, Swiss application software is just as important for the software companies interviewed as foreign application software.
The opinions of the respondents diverge to the greatest degree when assessing the importance of foreign application software. While very many agree that it is important, there are also Swiss software companies that are of quite a different opinion. However, respondents were agreed to a major degree on the relatively great importance of Swiss application software for their business (cf. Figure 2).
Figure 2: Importance of partnerships vs. unity.Partnerships are very important among the implementers. There are very few (8%) without partnerships. However, among the developers (19%) and the dealers (16%), there is a noticeable number of companies without partnerships.
On average, dealers have as many partnerships with foreign (2.2) as well as with domestic (2.1) types of software manufacturers. This is also true of the developers with 2.8 foreign and 2.7 domestic types of partnerships. The implementers are just as similarly internationally oriented with 2.9 and 2.8 as the dealers and the developers.
Partnerships with standard software manufacturers are on the whole very important for the turnovers of Swiss software dealers, implementers and developers. This also applies to companies that largely make their turnover with individual software. It is noticeable that while partnerships with foreign software manufacturers viewed overall are more significant, particularly in terms of application software, Swiss manufacturers are also of major importance.
Part 3: Procurement of advance work in the independent software sector
Economic value added takes place in individual companies. In the transition to the economic level, companies with similar main products are initially summarized in sectors. As the main products are only similar, but not identical, a basket of goods has to be created. A price and quantity index is defined on the basis of this basket. The real growth of a sector means that the quantity index is increasing.
IT services as a suitable aggregation
The economic statistics of the Swiss Federal Office for Statistics differentiates between 43 (business) sectors. IT services - our designation for the "data processing and database" sector - is one of these sectors. It covers
- software companies,
- databases,
- hardware consultancy,
- the maintenance and repair of office equipment, data processing equipment and devices,
- other activities associated with data processing.
Apart from trade in IT products, all the companies with the main product "software" are covered in it. What is not covered is the internal software development of companies in other business branches. Banks, in particular, produce a lot of software for their own use.